Swissquote's Ipek Ozkarderskaya points to 1.0470/1.0475 as the next key level to watch in EUR/USD

The Europeans and the Brits finally found an agreement on the very complicated Northern Ireland issue yesterday.  

Apparently, the war in Ukraine, and the fact that they had to collaborate reminded both sides of the Channel that they share common values – and a common enemy helped increasing the willpower to reach an otherwise impossible agreement.  

The deal requires a lot of extra work and resources, but it's the best it could get. So yesterday was a remarkably successful day for Rishi Sunak, even though the DUP expressed some concerns.  

Most currencies gained against a broadly weaker US dollar yesterday, so the fact that Cable traded above the 1.20 mark was not necessarily due to the so-called 'Windsor Framework', but the EURGBP remained offered below the 50-DMA, as the deal could be a gamechanger for the UK economy.  

It is said that British businesses amassed around £100 billion since the pandemic but didn't invest due to uncertainties. With a comprehensive deal, this cash could flow back to the UK economy, and lead to a 10% investment growth.  

For now, Invesco's manager said he remains 'underweight UK equities' and that 'this deal is not going to change that', while BlackRock and Aberdeen also warned that they don't necessarily expect the deal to remove only all of the uncertainty weighing on prices. 

And in all cases, if the deal could help sterling and small British stocks recover, all the FTSE 100 wants is a rebound in energy and commodity prices, rather than a Brexit deal... 

Energy update 

Occidental Petroleum missed earnings and revenue expectations when it announced its Q4 results yesterday, and fell 1.2% in afterhours trading, despite announcing a 38% increase in its dividend and a $3 billion share buyback.  

Shell, on the other hand, bounced almost 2% higher in Amsterdam yesterday despite a 1% decline in crude oil, as Goldman Sachs upgraded Shell from neutral to buy citing 'highest quality combination of assets with a leading global LNG and marketing businesses and strong chemical presence'.  

The barrel of American crude remained offered into the $75bp yesterday, as oil bears remain in charge of the market at the current levels. But solid support is expected before the $70bp level, as – like it or not - the global oil supply remains tight, China reopens, demand increases and Americans will have to refill their reserves. 

Too much optimism? 

European and US markets traded in the green yesterday, but the news other than the Windsor Framwork was not necessarily encouraging for the central bankers. 

US core durable orders expanded more than expected, and pending home sales surged 8% thanks to softer mortgage rates on a broad-based decline in yields. The latter data remained consistent with the strong and the resilient US economy, calling for more rate hikes from the Federal Reserve (Fed) to slow inflation. 

And more importantly, Manheim's used car prices index jumped more than 4% in the first half of February. That was the largest gain since 2009. So yes, the Fed must do more to slow inflation. 

Despite yesterday's relief, the US yields will certainly remain under a decent positive pressure. And higher yields will, at some point, weigh on equity valuations. That's a mathematical certainty.  

The S&P500 tested the 200-DMA, which stands at 3940, to the downside last Friday. A fall below that level is expected to accelerate the selloff. 

In the FX. 

The US dollar index gave back some gains, but given the strength of the economic data, yesterday's price action was likely a correction. We see this morning that the dollar is stronger across the board.  

The EURUSD sees decent resistance above the 1.06 mark even though the hawkish bets regarding the European Central Bank (ECB) rate hikes intensify. Swap markets now price in a rise in the ECB's deposit rate to 3.90%, while this pricing was just around 3.5% last summer. Plus, for the first time, traders bet that the ECB rate hikes will extend to the next year.  

The European Stoxx looked zen yesterday, faced with rising European yields, and a couple of disappointing data points including morose industrial and services sentiment in the Eurozone in February, low consumer confidence and lower-than-expected private loans growth.  

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The hawkish ECB bets are normally positive for the euro, but the Fed hawks say the last word. We could eventually see the euro selloff slow on the back of higher ECB rate bets, but not reverse.  

Technically, the next key level to watch in the EURUSD is the 1.0470/1.0475, including the 100-DMA and the major 38.2% Fibonacci retracement on the September to February rally, and which, if cleared should send the pair into the medium term bearish consolidation zone.  

A few European countries will reveal their latest CPI updates before Thursday's flash estimate for the zone, while Australia will also announce the latest CPI figure tomorrow. Inflation in Australia is expected to have fallen to 8.1% from 8.4% printed a month earlier. A stronger-than-expected read could fuel the Reserve Bank of Australia (RBA) hawks, but could hardly reverse the Aussie's trajectory against the dollar. The pair fell sharply after clearing the major 38.2% Fibonacci retracement and the 200-DMA, and is now in the bearish consolidation zone.